Rising interest rates and high valuations are driving REIT equity prices down. What remains to be seen is how the credit profiles of REIT bonds will hold up.

Fitch Ratings believes that the effects may not be as dire as some would think since the short-term rate increases that affect variable-rate debt would only modestly cut into debt service ratios for the majority of rated REITs.

These metric declines shouldn’t have widespread ratings implications, except for companies with debt-service ratios that are already at the low end of their ratings category. For example, mall REITs are particularly vulnerable for two reasons: they have higher leverage and significant exposure to variable-rate debt.

Mall REIT leverage currently averages 71.8%, based on Fitch data. One deal in particular—General Growth Properties (GGP) acquisition of Rouse last year for $12 billion—helped skew mall sector leverage higher. General Growth wound up with roughly $23 billion in debt, or 71% of its total capitalization as of last fall.

“We expect the effect of rising rates to be uneven, disproportionately affecting companies depending on their variable rate debt exposure and their laddered debt maturities,” says Tara Innes, managing director at Fitch Ratings.

Yet rate increases typically reflect a growing economy, which should improve property-level fundamentals. Economic growth, in turn, translates into stronger earnings that should offset some or all of this debt-service coverage ratio erosion.

Floating rate debt for rated REITs currently represents 17% of total debt on average. In 2004, by comparison, floating rate debt accounted for 8.9% of total debt. Mall REITs are carrying roughly 23.6% floating rate debt to total capital, which is more than double the 2004 average.